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FTSE 350: A focus on demographics, albeit priced for failure

We are seeing a more targeted approach to the marketing of next-generation products
FTSE 350: A focus on demographics, albeit priced for failure

You operate in a marketplace in which your core products are in secular decline, yet taxed to the hilt, and the subject of an ever-more stringent regulatory regime. You contributed around £9.96bn in duty tax receipts to HM Revenue and Customs in 2020-21, yet are given pariah status by Whitehall policymakers. Welcome to the tobacco industry.

You imagine that industry executives must be breathing easier (so to speak) now that the petroleum sector has taken on the mantle of whipping boy, although lobbyists are still faced with an uphill task. Raw numbers bear this out. Data analysed by the American Lung Association show that 13.7 per cent of adults in the US smoke, against a rate of 42.4 per cent in 1965. More importantly, smoking among the nation’s youth has demonstrated a precipitous decline since the mid-1990s.

Numbers in the UK have followed a similar pattern, so the two remaining FTSE 350 constituents in this space have been developing their product offering, while attempting to alter public perceptions of the industry.

To this end, Imperial Brands (IMB) launched a Soviet-style five-year strategy in 2021, with investment targeted at its “priority combustible markets” of the US, Germany, UK, Australia and Spain. The expansion of its ‘next-generation product (NGP)’ business, curiously characterised as “a meaningful contribution to harm reduction”, is to be achieved through consumer insights and increased reliance on data.

This more focused approach is evidenced by recent pilots of the group’s Pulze heated tobacco system in Greece and the Czech Republic, along with rejigged marketing of its blu vapour product in the US. The commercial benefits of this approach, assuming there are any, will accrue gradually, so Imperial is guiding for net revenue growth of around 0-1 per cent at constant currencies in FY 2022 – arguably a creditable outcome given the pressure on the industry.

Revenues at British American Tobacco (BATS) have bobbed around the £26bn mark since 2019, although last year’s top line was 6.9 per cent to the good at constant currencies. The group highlighted growth of its ‘new category’ product, but the lasting importance of its emerging markets was also apparent, with Pakistan, Bangladesh and Vietnam to the fore, although that could be considered less palatable on the public relations front.

It’s ironic that volumes for traditional tobacco products could decline further due to the spread of vaping, e-cigarettes and what BATS describes as “reduced risk products”. A key consideration for investors is the impact of conventional cigarette taxation and e-liquid subsidisation on demand and substitutability.


NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
British American Tobacco p.l.c.3,34576,20622.0%106.7Hold, 3,280p, 11 Feb 2022
Imperial Brands1,68516,01412.0%78.4Sell, 1,605p, 16 Nov 2021
Source: FactSet